Archives for Tax Updates

You may have heard recently about proposals in Congress to require the Treasury Department to contract with private collection agencies to collect amounts owed to the Internal Revenue Service. One concern arising is how the debt collectors will be able to identify themselves as legitimate. Whether or not the measure passes in some form or another, this discussion can serve as a reminder that we should be on the alert and protect our personal identity and our financial assets from thieves claiming to be an agent of the IRS.

Attempts to defraud come in various forms including e-mails, phone calls, letters, texts or other social media contacts, and can be very convincing with logos, addresses, and lingo as the scammer tries to stay one step ahead of detection. Don’t be misled by an imposter that wants you to believe that they are an agent of the IRS in order to get personal or financial information from you. Recent aggressive phone scams have used intimidation as a motivator to make their target turn over personal information to them. They can manipulate caller ID information, use fake names and IRS agent identifying information, and employ other increasingly sophisticated methods to lure you into their deception.

The IRS does not initiate contact with taxpayers by phone or electronic means (including e-mails, texts or other social media) to request personal, tax, or financial data. You should not reply to, open attachments, or click on a link in any unsolicited e-mail that claims to come from the IRS. You can help to stop scams by forwarding any suspicious e-mail you receive to phishing@irs.gov. The IRS compiles such information to alert taxpayers about fraudulent schemes through news releases and on its website at http://www.irs.gov/uac/Tax-Scams-Consumer-Alerts.

Let us know if you have any concerns that you cannot resolve, especially if you receive a notice from the IRS. We can help you determine authenticity and advise if you should take any further action.

Beginning in 2013, pursuant to the Affordable Care Act, a new 3.8 percent net investment income tax (NIIT) applies to taxpayer’s with a modified adjusted gross income (MAGI) above the applicable thresholds below (not indexed for inflation).

However, the aforementioned gross investment income items are reduced by certain expenses/deductions to arrive at the amount subject to the 3.8% NIIT. The following expenses properly allocable to items of gross investment income include:

Capital losses and capital loss carryovers to the extent of gains on stocks, bonds, mutual funds and investment real estate

For example, if a married couple filing jointly has $200,000 of wage income and $100,000 of interest and dividend income after allocable deductions (MAGI totaling $300,000), the 3.8% tax on net investment income applies to the $50,000 (the amount over the $250,000 MAGI threshold).

There are many tax planning ideas that should be considered by taxpayers subject to the 3.8% NIIT. A few of the more prevalent considerations are as follows:

Tax loss harvesting becomes more important, especially for taxpayers in the new 39.6% tax bracket

Tax exempt income investments may be more desirable

Owners of pass-through entities may want to take action to materially participate

Aggregation tax election for taxpayer with multiple rental properties may be necessary

This is only a brief overview of the 3.8% NIIT and is not intended to be exhaustive, so please contact us to discuss the various tax planning strategies available to your unique situation.

Several limits on personal exemptions and deductions are being imposed on individuals beginning in 2013 and many taxpayers will be affected by these new limitations. These deductions can change each year, so as the end of the year approaches you need to be aware of the new limitations.

The Phaseout of the Personal Exemption (PEP):

Single filers with adjusted gross income (AGI) in excess of $250,000 or couples who are married filing jointly and have AGI in excess of $300,000 will face phaseouts of their personal exemptions starting in 2013. For every $2,500 of AGI over the threshold of $250,000 ($300,000 married filing jointly), the $3,900 per-person personal exemption will be reduced by 2%. The personal exemption will be completely phased out once a single taxpayer’s AGI exceeds $372,501 ($422,501 married filing joint).

The Phaseout of Itemized Deductions (Pease):

This limitation will affect taxpayers with AGI in excess of $250,000 ($300,000 married filing joint). The Pease limitation reduces the value of itemized deductions by 3% of the AGI above the threshold amounts. This limitation will reduce the tax benefit of the mortgage interest, state income tax, home office, and various other itemized deductions on those taxpayers exceeding the AGI threshold. However, itemized deductions for certain medical expenses, investment interest, and for casualty, theft, or gambling losses are exempt from the phaseout.

Medical Expenses:

Historically, you have been able to deduct medical expenses that exceeded 7.5% of your AGI; however, in 2013 this threshold has increased to 10%. There is a temporary exemption from the increase from Jan. 1 2013 through Dec. 31 2016 for individuals age 65 or older and their spouses. Flexible Spending Accounts (FSA) contribution limits have decreased to $2,500 (from $5,000 in 2012) per person.

Hypothetical example— Susan had medical expenses of $5,000 and her AGI was $55,000. In 2012 she would be able to deduct $875 because this was the amount in excess of 7.5% of her AGI. In 2013, using the same facts, Susan would not be able to deduct any of her medical expenses because the total expenses do not exceed 10% of her AGI.

As always, please contact us to discuss the possible impact these limits might have on your tax liability for the year.

“Few of us ever test our powers of deduction, except when filling out an income tax form.”

Approximately 160 million workers can jump for joy that the 2 percent reduction of social security tax will be extended and apply to wages paid through February 29, 2012.

The tax benefits are not just for employees, but also independent contractors and other self-employed persons who pay self-employment taxes (SECA tax) on their earnings. The SECA tax is reduced to 13.3% from 15.3% on income up to the social security wage base of $110,100. Note that there may be a recapture of any benefits a taxpayer receives on wages in excess of $18,350 for January and February if the payroll tax cut is not extended beyond February.

Many are anticipating the employee payroll tax holiday to be extended through the end of 2012 since neither political party wants to be responsible for “increasing” taxes on working Americans in an election year.

The employee payroll tax holiday extension should not be a bookkeeping and payroll processing burden for employers. The IRS has instructed employers to implement the new payroll tax rate as soon as possible in 2012.

Due to the depletion of state unemployment tax insurance funds, many states have had to borrow from the federal government to cover unemployment benefits. When these loans remain unpaid for over two years, a surtax is triggered and employers must pay additional FUTA taxes. The FUTA surtax for Virginia is 0.3%.

Virginia employers who paid employees more than $7,000 in 2011 will have to pay an additional $21 ($7,000 x 0.3%) in FUTA taxes per employee when filing their annual 2011 Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return).

In addition, employers must prepare and attach Schedule A (Form 940) to calculate the additional FUTA. Employers in twenty states, including Virginia, plus the Virgin Islands, are subject to the FUTA surtax.